Tax & NIC Explained

N.B. RMTA are not tax advisers, the following information is a guideline only and is liable to change,  please seek any additional advise from your employer or tax adviser. 

As an employee, you pay Income Tax and National Insurance on your wages through the PAYE system.  It is important to check you have the right tax code and are paying the right amount.

Do you need to pay Income Tax and National Insurance?

You can earn a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax.  In general, everyone gets the same Personal Allowance of £11,500 for the year 2017-18.

How much can you earn before tax?

As an employee: You pay National Insurance contributions if you earn more than £157 a week.

Your pay is 12% of your earnings above this limit and up to £866 a week (for 2017-18).

The rate drops to 2% of your earnings over £866 a week. E.g if you earn £1,000 a week you pay:

£0  on the first £157,  12% (£80.6) on the next £709, 2% (£3.4) on the next £134

How much Income Tax will I pay: Gross and Net Pay

If you’re an employee, the money you earn (your salary or hourly wage) is called your gross pay.

When deductions from gross pay (Tax and National Insurance Contributions) have been deducted the amount you receive is called your Net Pay.

You can see what your gross pay was and how much has been taken off (if anything) on your payslip.

How is Tax and National Insurance paid?

If your income is more than your Personal Allowance in a year, you have to pay tax.

In general your Personal Allowance is spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay.  They know how much to take out through a system called PAYE (Pay As You Earn).  If it turns out at the end of the year you have paid too much tax, you can get a refund; too little and you will have to pay shortfall.  Your employer will also make National Insurance deductions from your pay.  This is worked out on a weekly or monthly basis, or however frequently you get paid. Unless there has been an error, you cannot get back any of the National Insurance you pay, even if your earnings fall later in the year.

How PAYE works

When you start work, you’ll need to hand in a P45 form to your Supply Agency or your Umbrella/Payroll Company (only if you have previously worked in the U.K) from your last job.

What is a tax code?

The amount of tax you pay depends on:

How much income you have, how much tax you’ve already paid in the year, as well as your Personal Allowance.  Different people have different tax codes, depending on their circumstances. Each year, HMRC sends out a Coding Notice telling you what your tax code is and how much tax you’ve paid.

You can also find your tax code on your payslip. It’s usually made up of a few numbers and a letter.

How is my tax code worked out?

Your tax code is normally the amount you can earn without paying tax, divided by 10, with a letter added. E.g, Tax code: 1150L =  1150 becomes £11,500 earned before tax.

My tax code has no number, or starts with D followed by a number

This is usually because you have more than one source of income.  Your Personal Allowance is used up on your main income source, and you pay tax on everything you earn from your second income source. E.g, you might work a main job during the day and do shifts in a pub or work in a factory in the evenings.  If you earn more than £11,500 a year in your main job, your second job will be taxed at the basic rate. This can also apply to pensions or money paid out by investments (dividends).

Do you have the right tax code?

Sometimes your tax code isn’t right for your circumstances. E.g, if you started work recently and your correct tax code hasn’t been worked out before your first payday, you might be on an ‘emergency tax code’.  This means you might not be given the right Personal Allowance for you.

What do I do if I think my tax code is wrong?

If you think your tax code is wrong, or if you’re in any doubt, contact your Umbrella/Payroll Company or Supply Agency.

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